The Section 475(f) mark-to-market election
Lesson 10 · about 11 min
Education, not tax advice: rules, rates and thresholds change every year, so confirm anything you plan to act on with a qualified tax professional.
Section 475(f) lets a taxpayer with trader status elect to account for their trading the way dealers do: mark everything to market at year end and treat every gain and loss as ordinary. It is the most consequential choice in trader taxation, it is easy to get wrong on timing, and it is not a free lunch. This lesson lays out what it gives, what it takes, and how the deadlines work, without telling you which way to go.
What the election does
For the securities (and, if separately elected, commodities and 1256 contracts) covered by the election:
- Gains and losses become ordinary, not capital. Reported on Form 4797 rather than Schedule D.
- Open positions are marked to market on December 31, with the unrealized gain or loss recognized that year and basis reset.
- The wash sale rule no longer applies to the covered securities.
- The $3,000 capital loss limit no longer applies. A net trading loss is an ordinary loss that offsets any income in full and, if it exceeds all income, can create a net operating loss to carry forward.
The election does not, by itself, do anything about self-employment tax (trading gains remain exempt from it either way), does not change the trader-status requirement (you must have TTS to make it), and does not cover long-term investment positions you have properly segregated.
What it gives up
- Long-term capital gain rates on the covered securities. Every gain is ordinary, even on a position held five years. Traders who hold a long-term book separately can exclude it by identification, but sloppy segregation puts those gains at ordinary rates too.
- 60/40 treatment, if the election is extended to 1256 contracts. Most traders who make the election limit it to securities and leave futures under 1256, which the law permits; the two elections are separate.
- Capital loss carryforwards get stranded. A pre-existing capital loss carryforward can only offset capital gains. Once trading gains become ordinary, the carryforward has nothing to absorb except gains from the segregated investment account. A trader with a $60,000 carryforward who elects 475 may not use it for years.
- Deferral. Mark-to-market means an open winner on December 31 is taxed this year.
- Flexibility. The election, once made, stays in force until revoked, and revocation has its own deadline and procedure.
Worked comparison
Illustrative rates: 24% ordinary, 15% long-term. Two scenarios for a trader with TTS.
Scenario A: a losing year. Net trading loss of $45,000, plus $90,000 of salary from a spouse (joint return).
| Without 475 | With 475 | |
|---|---|---|
| Loss usable this year | $3,000 (capital) | $45,000 (ordinary) |
| Taxable income reduction | $3,000 | $45,000 |
| Federal tax reduction at 24% | $720 | $10,800 |
| Remaining loss | $42,000 carried forward as capital | $0 |
The election turned a loss that would take 14 years to use at $3,000 a year into an immediate $10,800 of tax relief.
Scenario B: a winning year with wash-sale exposure. Net economic gain $30,000, but $25,000 of losses are washed into an open position at December 31.
| Without 475 | With 475 | |
|---|---|---|
| Reported gain | $55,000 (gains recognized, washed losses deferred) | $30,000 (no wash rule; open position marked) |
| Federal tax at 24% | $13,200 | $7,200 |
The $25,000 comes back next year without 475, but the trader pays $6,000 more now.
Scenario C: where it costs money. A trader with $20,000 of short-term trading gains who also sells a long-held position in the same account for a $40,000 gain, without having segregated it.
| Without 475 | With 475 (no segregation) | |
|---|---|---|
| Short-term / ordinary | $20,000 × 24% = $4,800 | $60,000 × 24% = $14,400 |
| Long-term | $40,000 × 15% = $6,000 | $0 |
| Total | $10,800 | $14,400 |
Segregating the investment position into a separate, identified account would have preserved the $6,000 long-term treatment. The election punishes sloppiness.
Deadlines: the part that catches people
For an individual or an existing entity, the election for a given year must be made by the original due date of the prior year's return, without extensions: for calendar-year individuals, April 15 of the year the election takes effect. It is made by attaching a statement to that prior-year return or to the extension request for it. There is no form to file with the IRS at that moment; the statement itself is the election.
A new entity (a new LLC or partnership formed to trade) can elect within 2 months and 15 days of its formation, by placing the election in its books and records. This is why some traders form an entity mid-year: it is the only way to get 475 treatment for a year already in progress.
In the year the election first applies, Form 3115 (change in accounting method) is filed with that year's return, and a Section 481(a) adjustment brings open positions onto the mark-to-market method as of January 1.
Missed the deadline? Relief is rare. The election is prospective only: it cannot rescue a losing year that has already happened.
Revocation follows the same calendar: a statement by the original due date of the prior year's return, effective the following year, with another Form 3115.
State treatment varies, the Section 199A deduction on 475 income phases out at higher incomes because trading is a specified service business, and the 3.8% NIIT generally still applies.
Key idea: 475(f) trades away long-term rates, deferral and the use of old capital loss carryforwards in exchange for ordinary loss treatment, no wash sales and no $3,000 cap. It must be elected by April 15 for the year it takes effect, so it protects future years only.
Try it: Using last year's actual numbers, fill in Scenarios A through C for yourself. Then write down your capital loss carryforward, if any. Those four numbers are the entire conversation you would have with a trader CPA about whether the election fits; the course does not answer it, and neither should anyone who has not seen your figures.
Recap
- 475(f) makes trading gains and losses ordinary, marks open positions to market on December 31, removes wash sales and removes the $3,000 loss cap.
- It gives up long-term rates, deferral and, unless carefully excluded, 60/40 on 1256 contracts; existing capital loss carryforwards can be stranded.
- Long-term investments must be segregated in a separate identified account to keep capital treatment.
- Individuals elect by April 15 of the effective year (with the prior-year return or extension); new entities within 2 months and 15 days of formation.
- Form 3115 and a 481(a) adjustment are filed in the first year; revocation uses the same calendar.